The FOFA reforms will commence on 1 July 2013 for all financial service providers who have not already opted in. This will result in fundamental changes to how financial service providers operate. If you are a financial service provider and have not prepared your business for commencement of these rules you may well have left it too late.
On-going fee arrangements - Financial Disclosure Statements
The first reform is that if you provide personal advice to a retail client and have an on-going fee arrangement such as a trailer commission, then you must give the client a Financial Disclosure Statement (FDS) at least 30 days before what is called the “disclosure day”.
If no FDS has been given to the client in relation to the on-going fee arrangement since the arrangement was entered into, the “disclosure day” is the anniversary of the day on which the arrangement was entered into. ASIC has issued a regulatory guide RG 245 to assist financial service providers to comply with this obligation. The disclosure day will therefore start for you every day from 1 July 2013. What do you do if you cannot work this out?
A concession has been made to allow financial service providers to reset the disclosure day to 1 July 2013 where it would be unreasonably difficult or onerous for it to work out the disclosure day. If you do reset the disclosure day then you must within 30 days of 1 July 2013 send out an FDS to every one of your retail clients with respect to whom you have given personal advice and you are receiving any on-going fee arrangement such as trailer commissions. However you need to be ready to commence sending out FDS within 30 days of 1 July 2013 if you wish to rely upon this concession.
It is important for you to comply because you can no longer collect the fee unless you comply.
On-going fee arrangements - renewal notices
The second associated reform is that you must give the client a renewal notice to the client at least 30 days before the second anniversary on which the arrangement was entered into and then on each second anniversary thereafter. If is important for you to comply with this requirement because the client has to opt-in in order for you to continue to collect the on-going fee. If the client does nothing then you cannot continue to collect the on-going fee. This probably means you need to get your client into your office to renew the arrangement.
New statutory duties
The third reform is that if you provide personal advice to a retail client you have two statutory duties which are in the nature of fiduciary duties namely:
- you must act in the best interests of the client, and
- where there is a conflict between the interests of the client and your interests and certain other specified associated persons, then you must give priority to the client’s interests when giving the advice.
These new statutory duties do not replace the existing similar fiduciary duties that you may not have been aware that you already owe your clients.
The penalties for breaches of these statutory duties are severe including orders by a Court for compensation to be made to the client and penalties of up to $200,000 for an individual and up to $1m for a corporation.
Ban on conflicted remuneration
The fourth reform that applies whether or not you give personal advice is that conflicted remuneration is banned. A financial services licensee is also under an obligation to ensure that its representatives and employees do not accept conflicted remuneration. Further a product issuer must not give a financial services licensee or a representative of a financial services licensee conflicted remuneration.
The term “conflicted remuneration” means any monetary or non-monetary benefit given to a licensee or representative who provides financial product advice to persons as retail clients that because of the nature of the benefit or the circumstances in which it is given could reasonably be expected to influence the financial product advice, by either influencing the choice of financial product being recommended or by otherwise influencing the financial product advice more generally.
The onus of proof that remuneration is not conflicted remuneration is on the financial services provider.
However there are a number of exceptions including some grandfathering provisions and permitting monetary commissions or incentive payments in relation to executiononly sales or issues of financial products if certain requirements are met but you need to obtain proper legal advice as to whether or not you may rely upon these exceptions.
ASIC has issues RG 246 to assist compliance with these requirements.
The penalties for non-compliance are severe including orders by a Court for compensation to be made to the client and penalties of up to $200,000 for an individual and up to $1m for a corporation.